September 11, 2012

According to this Greg Meyer piece in the FT, Barclays estimates that $6 billion have flowed out of commodity index investments in 2012, and that many institutional investors are reducing exposure to commodities.

The anti-speculation frenzy that reached a peak in 2008, but has never gone away, is predicated on the belief that index investing-“massive passives” in the words of CFTC Commissioner Bart Chilton-exert a disproportionate influence on prices. So, this outflow of indexing money should have led to a decline in commodity prices right? But they have been up over 2012: one broad index, the UBS Bloomberg CMCI is up from 1520 at the end of 2011 to 1628 today, about a 7 percent increase.

But the anti-speculation folks have their story, and they’re sticking with it. Sayeth Dennis Kelleher of “Better Markets”, “There’s excessive speculation in commodity markets which is driving up prices.” QED.

This is so ridiculous – when commodity prices drop, except oil, they will scream that there is a recession: if or when that occurs we will scream that we are in a recession because no one will bid up this crap, or worse, the speculators refused to do their patriotic duty to bid them up instead of shorting. this gives us two premi:

Speculators are evil because they increase prices artificially
Speculators are evil because they depress prices artificially

It is true that it is not necessarily speculators per-se moving prices, but it is a fact that prices are rising due to more money–mainly investment money–entering the markets. If, by chance, this is in doubt, I can certainly prove it for you.